More and more mutual funds are now process-driven

Mahesh Nayak and Shoaib Zaman
May 22, 2014

Chintan Haria has been with ICICI Prudential Mutual Fund (MF) for close to nine years. He has risen through the ranks - growing from a dealer to a fund manager. Haria has seen the equity asset under management (AUM) of the fund house growing 2.5 times, from Rs 8,000 crore in 2005/06 to Rs 20,000 crore in 2013/14. The biggest change at ICICI MF, according to him, is that fund management has become far more organised and process-driven than before. "In 2005/06, it was more of individual performance and individual style of operation of a fund manager. No one had any clue as to what the fund manager was doing. It was sales-driven, but today it's investor-centric," says Haria. "Today the team knows what the fund manager is doing, why is he buying or selling a particular stock. Ideas and knowledge are shared. We have meetings every Monday to discuss sectors."

{blurb}

The change came about in 2007/08, when Nimesh Shah joined the fund house as its managing director. He brought in processes that have yielded results - today 90 to 95 per cent of ICICI Prudential Funds beat the benchmark. "Processes create discipline, which restricts people from getting carried away and taking emotional decisions," says Shah. There was a time when rumours of Nilesh Shah, former deputy managing director, quitting would create panic in the asset management company (AMC). But today, even after the exit of Nilesh Shah, there has been no impact on the performance or the AUM of the fund. " The advantage of a process-driven fund is that if the fund manager leaves, it is easier for the fund house to find another who can operate within the defined guidelines," says Hemant Rustagi, CEO, Wiseinvest Advisors.

Indeed, this is a growing trend in India. So, has the mutual fund business become more commoditised? "The concept of star fund managers has been more prevalent in the west in past. Fund houses have realised the importance of a disciplined and process-driven investment philosophy when compared to an individual-driven fund. The latter is viewed as more ephemeral in nature," says Vivek Kudva, Managing Director-India and CEEMEA (Central & Eastern Europe, Middle East and Africa), Franklin Templeton Investments.

Jimmy Patel, CEO at Quantum Mutual Fund, has a slightly different view. "Star fund managers are good for pulling in AUM and thereby investors in the fund," he says. This was clearly evident from last year's new fund offer from IDFC, which collected over Rs 240 crore for its three- year close-ended IDFC Equity Opportunity Series 1. One of the reasons for the good response to the fund was the fact that Kenneth Andrade would be managing it. Andrade had built a formidable reputation as the fund manager of IDFC Premier Equity Fund. "MFs like to say they are process-driven when that may not always be the case," says the CEO of a domestic mutual fund on condition of anonymity.

Fund managers will always matter to some extent despite the keenness to reduce dependence on them in recent years, say some experts. "Processes are like black boxes. You can set in a process and appoint two fund managers with the same mandates. But there will be a clear difference in performance and that would be because of the fund manager," says Vinod Jain, founder of Jain Investment, a Mumbai-based mutual fund advisory firm that manages Rs 200 crore. "There are AMCs that talk more about the process and play down the fund manager but that is basically to prevent any negative sentiment or sudden outflow of money that could result if the fund manager leaves."

Puneet Chaddha, CEO at HSBC Global Asset Management, concurs. "It is the fund manager's responsibility to deliver investment performance and he is accountable for it. There is no doubt that the fund manager is in command and has the last word in running the fund and, therefore, has full autonomy," he says.

But over the last few years, most top fund managers have had chequered track records. At different points, there have been different fund houses holding the top positions, in terms of returns. At one point, the top performer was Reliance MF, which was gradually overtaken by HDFC MF and SBI MF. "The concept of a star fund manager can work up to a certain extent, maybe for a year or two. It doesn't work all the time. We have seen fallen stars also, because they took undue risks," says P.V.K. Mohan, Head, Equity at Principal PNB AMC.

Stars are out of fund management, according to Chandresh Nigam, CEO at Axis Mutual Fund. "Processes may not eliminate risk entirely, but they will contain the loss," he says. The onset of the global financial crisis in 2008 highlighted the need for managing money within the framework of risk parameters. "With the industry growing, process has become extremely critical as things can't be left to people alone. Risk management is the key as today we have got institutionalised and are dealing with risk averse people for whom consistent performance and low volatility in the portfolio is a major criteria," he adds.

Most analysts agree that both processes and fund managers will play key roles in an MF. "It's like an F1 race. The mutual fund process is like the car that runs at a constant speed on the straight road, but the real skills are only seen at the bends or at the pitfall. This is where the fund manager comes into play. With his experience and expertise, he knows exactly when and where to make that turn," sums up a fund manager.